New SME rating tool to ease small firms’ access to credit

Small and Micro Enterprises (SMEs) have lately become the “heart” of the Kenyan banking sector, surpassing the retail market which in the previous years had been a goldmine for most commercial banks.

During the peak season for the retail market, the rate of lending rose and threshold requirements for lending were lowered.

Intensive marketing strategies were also rolled out to attract more retail borrowers.

Many of the retail customers took advantage of the lowered thresholds and dropped their loan applications at numerous banks to increase their chances of success.

And due to the information asymmetry among banks, they ended up with numerous huge loans beyond their ability repay.

But when the banks sought repayments from these retail customers, the money was not forthcoming.

Debt recovery slumped and soon the global crisis set in.

Soon the retail market became exhausted and further market opportunities only pointed to debt consolidation for the already indebted retail lot.

The fate of SMEs had been left at the mercy of microfinance institutions to provide the start- up capital, a risky venture that banks dreaded and left to the MFIs.

For the few SMEs that have dared to put in their applications for loan facilities to strengthen their working capital from commercial banks, the underwriting system have became even more tighter.

Instead of the loan underwriting system of MFIs, which are only anchored on the three Cs of lending; character, capacity, and capital, they are subjected by banks to five Cs system of underwriting which includes the three , in addition to condition and collateral.

With the latest economic growth trends, many pundits have forecasted that the future of any economy, especially in the service industry in terms of market potential lies in the SMEs sub-sector that is currently growing rapidly in various industries.

The informal nature of their operation has seen a great majority of them operate without proper data and structure on their technical, managerial and financial aspects of their daily operations.

To potential lenders that anchor their credit analysis on these, the risk related to lending to these SMEs is extremely high.

SMEs are low-risk as most of them have niche markets where they have huge growth potential to exploit.